How the market that cried shortage is turning into a surplus

The oil market has flipped from fearing a shortage to bracing for a glut. Three months ago traders were pricing in a severe supply disruption, now mns of barrels are flooding back onto the market, prices are sliding, and the conversation has shifted from scarcity to surplus, Bloomberg reports.

The turnaround has been fast: Brent has erased all of its wartime gains, falling around 43% from its late-April peak, while physical crude markets are showing their weakest pricing signals since the pandemic. More than 60 mn barrels stranded during the conflict have re-entered global markets, just as Gulf producers ramp up exports and Iranian crude returns following the US sanctions waiver.

China is the other half of the surplus story: China helped stabilize oil markets during the war by sharply cutting imports — freeing up barrels — as logistics through the Gulf became increasingly uncertain. But now that supplies are starting to gain traction, Chinese refiners have yet to return to meaningful volumes. Imports remain some 5 mn bbl / d below pre-war levels, leaving producers across the Middle East chasing a much smaller pool of buyers.

For perspective: Oman crude — one of the Middle East’s key benchmark grades — has fallen to its widest reduction to Dubai since 2020, while some Atlantic Basin producers have been forced to offer steep price cuts to attract buyers. Cargoes are also traveling farther than usual in search of demand, with UAE crude being marketed as far away as the US and Hawaii.

The result is a market that suddenly looks oversupplied. Analysts at Goldman Sachs and Morgan Stanley have warned that the oil market risks slipping into a glut heading into next year unless demand picks up or producers slow supply growth.

Market share or market support?

Opec’s new dilemma: During the conflict, the producer alliance’s priority was restoring disrupted supply and reassuring markets that enough oil would be available. Now, the question is becoming whether those same barrels risk overwhelming demand.

That puts the oil cartel back in familiar territory. If inventories continue rebuilding and prices remain under pressure, the group may once again have to choose between defending prices through fresh production cuts or continuing to increase output to protect market share. The dilemma could prove difficult after several producers spent months preparing to bring shut-in capacity online.

REMEMBER- Asking members to reverse course so quickly would reopen the same internal tensions that have repeatedly tested the alliance over the past years (think UAE’s exit and Iraq’s warnings on quota increase). Having invested heavily in expanding production capacity, several members have become reluctant to leave expensive capacity sitting idle for prolonged periods, raising the possibility that the group may tolerate lower prices for longer if it believes maintaining or expanding market share outweighs the benefits of another round of supply cuts.

What happens next will depend on three things: whether the US-Iran MoU holds, whether Opec is willing to slow or reverse its production increases to support prices, and whether China returns to the market in force. Until then, traders see the market shifting from managing scarcity to managing excess supply.